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Tuesday, May 20, 2003

Resona Resonates

The world is gradually waking up to the significance of the timing and scale of the Japanese government intervention in Resona, the country's fifth largest bank. First Stephen Roach:

The just-announced injection of 2 trillion yen ($17 billion) of public funds into the Resona Bank may well be the functional equivalent of a de facto nationalization of Japan's fifth largest bank. Unlike most of Japan's banking reform initiatives, this action was not focused directly on the write-offs and disposal of nonperforming loans (NPLs). Instead, it was aimed at restoring the NPL-impaired capital base of this troubled institution to international standards. In doing so, it appears that the government will effectively own approximately 80% of Resona’s total capital — at least, that’s the inference that can be taken from a statement by Prime Minister Koizumi, who implied that the bank’s capital adequacy would rise from around 2% to about 10%. The magnitude and scope of this action are without precedent in the recent history of Japanese banking reform; the bailout is equal to a little more than 20% of all funds previously injected into the banking system, or the equivalent of 0.4% of total Japanese GDP. Moreover, Japanese press reports suggest that Resona’s president and four other senior executives will resign, presenting the government with an opportunity to install a new reform-minded leadership. As such, this initiative hints that the heavy lifting of Japanese financial sector reform could at long last be under way. If that’s the case — and it remains a big “if” — we then need to look at Japan in an entirely different light.
Source: Morgan Stanley Global Economic Forum

No the big question is how much significance can we put on this intervention. Reading the tea leaves is a difficult job here. The key problem is whether the authorities acted as part of a concerted policy, or whether they had no alternative. Over to David Pilling, our 'man in Tokyo':

The Financial Services Agency yesterday insisted that the first it had heard of Resona's difficulties was on Saturday, the very day it agreed to inject about Y2,000bn ($17bn) into Japan's fifth-largest bank. If that is true, then the FSA's assurances that it was "not aware" of any other large Japanese bank being in trouble was not exactly reassuring. Yet the FSA was adamant yesterday that the decision to rescue Resona had been an auditing, and not a regulatory, one. "This is a matter between the bank and its auditor," an agency official said. "On 17 May, Resona reported formally that their capital adequacy ratio was going to be below [the required] 4 per cent . . . and we took reasonable action."

The word "formally" possibly sheds light on what happened. What seems most likely is that the regulator, at least informally, had known very well what was happening for weeks and had been discussing the issue with Resona behind the scenes. An associate of Heizo Takenaka, financial services minister, yesterday said that the agency had been fully aware that Resona had potential problems with its auditor since mid-April. The confusion over what the FSA knew, and when, begs the most fundamental question of the whole episode. Did the FSA decide that it was time to make an example of one bank by forcing it to accept capital? Or did it desperately try to salvage Resona, before reluctantly bowing to the inevitable and agreeing to provide fresh funds? According to Jean-Francois Minier, managing director of Dresdner Kleinwort Wasserstein, the decision must have come from the government. "At the end of the day it would be hard for the auditor to get tougher on its own," he said. "I'd be surprised if they were to do this independently." Mr Minier said that, if the government wanted to make an example of one bank, Resona was the one to go for.

First, it was purely domestic, having ditched its international businesses in the run-up to merger. That meant the government did not have any international repercussions to worry about, particularly in dealing with counterparties. Second, Resona, being so heavily dependent on deferred tax assets to pad its capital base, was in no position to object. There were suggestions that some Resona executives were furious at the government yesterday. But, officially, they asked the state for money and fell on their swords. That saved any messy recriminations linked to enforced nationalisation, which some senior executives at bigger banks have vowed to fight in court. That is the positive spin on events. But what if what the FSA said is taken at face value? What if it really did not know that Resona was about to be declared dangerously undercapitalised?

The ramifications of that are even more startling. To begin with, it would mean that Japan's financial regulator was woefully in the dark about the state of the institutions it is entrusted to monitor. For months now, senior FSA officials have been denying that the financial system had any problems that could not be solved through existing policies. But if the agency got Resona so wrong, it is possible that it is also misinformed about the real financial health of other Japanese banks, national and regional. Even more worrying, if the decision to pull the veil off Resona was really an auditing one, then auditors are now arguably the most powerful force in Japan. Because there is not, as yet, any clearly defined political decision on how to deal with tax deferred assets, a policy void has opened up. It is now apparently up to auditors to interpret current guidelines. In other words, as talk of bank nationalisation grows, the real decisions about what to do about Japan's shaky financial system may just have been privatised.
Source: Financial Times

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